A Theory of Income Smoothing When Insiders Know More than Outsiders
Viral V. Acharya
New York University - Leonard N. Stern School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance
Bart M. Lambrecht
University of Cambridge - Judge Business School; Centre for Economic Policy Research (CEPR)
March 10, 2015
Forthcoming, Review of Financial Studies
We develop a theory of income and payout smoothing by firms when insiders know more about income than outside shareholders, but property rights ensure that outsiders can enforce a fair payout. Insiders set payout to meet outsiders’ expectations and underproduce to manage future expectations downward. The observed income and payout process are smooth and adjust partially and over time in response to economic shocks. The smaller the inside ownership, the more severe underproduction is, resulting in an “outside equity Laffer curve”.
Number of Pages in PDF File: 54
Keywords: payout policy, asymmetric information, under-investment, finance and growth
JEL Classification: G32, G35, M41, M42, O43, D82, D92
Date posted: November 16, 2011 ; Last revised: March 24, 2015
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